Editing Ronald Coase (section)

==="The Problem of Social Cost"===
{{Main|The Problem of Social Cost}}
[[File:Coase working 2000s.jpg|thumb|Coase at the University of Chicago Law School in 2003]]
Upon publishing his article The Federal Communications Commission in 1959, Coase received negative feedback from the faculty at the University of Chicago over his conclusions and apparent conflicts with [[Arthur Cecil Pigou|A. C. Pigou]]. According to Coase, "What I said was thought to run counter to Pigou's analysis by a number of economists at the [[University of Chicago]] and was therefore, according to them, wrong.  At a meeting in Chicago I was able to convince these economists that I was right and Pigou's analysis faulty." Coase had presented his paper in 1960 during a seminar in Chicago, to twenty senior economist including [[George Stigler]] and [[Milton Friedman]]. He gradually won over the usually skeptic audience, in what has later been considered a "paradigm-shifting moment" in the genesis of Chicago Law and Economics.<ref>{{cite book |first=William |last=Davies |title=The Limits of Neoliberalism: Authority, Sovereignty and the Logic of Competition |publisher=Sage |year=2014 |isbn= 978-1473905337|pages=87–90 |url=https://books.google.com/books?id=6119AwAAQBAJ&pg=PT87}}</ref> Coase would join the Chicago faculty four years later.

Published in the ''Journal of Law and Economics'' in 1960, while Coase was a member of the Economics department at the [[University of Virginia]], "The Problem of [[Social Cost]]" provided the key insight that it is unclear where the blame for externalities lies. The example he gave was of a rancher whose cattle stray onto the cropland of his neighbour. If the rancher is made to restrict his cattle, he is harmed just as the farmer is if the cattle remain unrestrained.

Coase argued that without [[transaction cost]]s the initial assignment of property rights makes no difference to whether or not the farmer and rancher can achieve the economically efficient outcome. If the cost of restraining cattle by, say, building a fence, is less than the cost of crop damage, the fence will be built. The initial assignment of property rights determines who builds the fence. If the farmer is responsible for the crop damage, the farmer will pay for the fence (as long the fence costs less than the crop damage). The allocation of property rights is primarily an equity issue, with consequences for the distribution of income and wealth, rather than an efficiency issue.

With sufficient transaction costs, initial property rights matter for both equity and efficiency. From the point of view of economic efficiency, property rights should be assigned such that the owner of the rights wants to take the economically efficient action. To elaborate, if it is efficient not to restrict the cattle, the rancher should be given the rights (so that cattle can move about freely), whereas if it is efficient to restrict the cattle, the farmer should be given the rights over the movement of the cattle (so the cattle are restricted).

This seminal argument forms the basis of the famous [[Coase theorem]] as labelled by Stigler.
In 1990,  Coase wrote that he feared "The Problem of Social Cost" had been widely misunderstood.<ref>[https://www.law.uchicago.edu/lawecon/coaseinmemoriam/problemofsocialcost The Problem of Social Cost] University of Chicago Law School</ref>